“Are you suggesting that the Alt-As won’t “recast” like the Option ARMs? Because when the reset hits, it’s not just the interest rate. Nearly all of these borrorers are now well under water (See WSJ front page today). This means due to their decreasing LTV, monthly payment will still go up regardless of interest rate.”
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I think FSD’s general point on this issue is that lower LIBOR = lower reset payments = no payment shock = no forced default. Maybe an oversimplification but that’s the gist. I agree as I have for the past year.

Alot of the 3/1 and 5/1 ARMS in SD have 10 yr IO periods, so anyone in these loan products is probably paying less now than they were originally. If LIBOR had not fallen off a cliff but was still in the 5.5% range, we would probably have had a ton more defaults after reset than we have seen.

I believe a huge percentage of people underwater are not in default because their payments are so low right now. I think the mentality is to ride things out for awhile and see what happens down the road. This environment was created by LIBOR tanking – otherwise I thnk most of these people would have had their hand forced by a big payment spike on reset and many would have just defaulted.